India's Bond Yield Set for Biggest Quarterly Advance Since 2013

  • Concern over fiscal-deficit targets hurt sentiment: Peerless
  • Rupee on course for a third straight quarterly decline

India’s 10-year sovereign-bond yields completed their biggest quarterly advance since 2013 amid concern the government will struggle to meet its budget-deficit targets and borrow more to bridge the shortfall.

A proposed increase in salaries of millions of civil servants and a plan to clear the debts piling up at power distribution companies threaten Finance Minister Arun Jaitley’s goal of fiscal consolidation. The administration may have to reassess its fiscal projections for the year starting April 1, the Finance Ministry said in a Dec. 18 report. The budget shortfall reached 87 percent of the full-year target in the April-November period, official data showed Thursday. This month’s rise in U.S. interest rates also damped investor sentiment.

“The bond market’s concern is that the government may deviate from its fiscal path,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co., which oversees 8.6 billion rupees ($130 million). “Investors also pulled out money given the Fed rate hike.”

The yield on notes due May 2025 jumped 22 basis points this quarter to 7.76 percent in Mumbai, prices from the central bank’s trading system show. That’s the biggest increase for a benchmark 10-year security since the quarter ended September 2013. The yield rose one basis point on Thursday.

India’s government estimates gross borrowing at 6 trillion rupees in the year ending March 31. While steps to boost taxes will help it reach the deficit target of 3.9 percent of gross domestic product in this period, the 3.5 percent goal for the 12 months ending March 2017 could be pressured by an expected increase in state salaries and higher military pensions, according to the mid-year review. SBI DFHI Ltd. predicts that could raise borrowings by as much as 500 billion rupees next year.

Rupee Weakens

Even so, bonds capped a second annual gain, with the 10-year yield falling 10 basis points, as consumer-price inflation slowed and the central bank cut benchmark interest rates four times in 2015. Foreign holdings of sovereign and corporate debt dropped 49.5 billion rupees this month through Dec. 30, paring this year’s inflow to 506 billion rupees, data from the National Securities Depository Ltd. show.

The rupee weakened 0.9 percent since Sept. 30 to 66.1525 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The currency dropped 4.7 percent in 2015 in a fifth year of declines, the longest stretch since 2001. It rose 0.4 percent on Thursday. The rupee will depreciate 2.7 percent to 68 by end-2016, based on the median estimate in a Bloomberg survey of analysts.

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